Exchange Rates and Foreign Direct Investment: an Imperfect Capital Markets Approach

36 Pages Posted: 23 Apr 2004 Last revised: 19 Dec 2022

See all articles by Kenneth Froot

Kenneth Froot

Harvard University Graduate School of Business; National Bureau of Economic Research (NBER)

Jeremy C. Stein

Harvard University - Department of Economics; National Bureau of Economic Research (NBER)

Date Written: March 1989

Abstract

We examine the connection between exchange rates and foreign direct investment that arises when globally integrated capital markets are subject to informational imperfections. These imperfections cause external financing to be more expensive than internal financing, so that changes in wealth translate into changes in the demand for direct investment. By systematically lowering the relative wealth of domestic agents, a depreciation of the domestic currency can lead to foreign acquisitions of certain domestic assets. we develop a simple model of this phenomenon and test for its relevance in determining international capital flows.

Suggested Citation

Froot, Kenneth and Stein, Jeremy C., Exchange Rates and Foreign Direct Investment: an Imperfect Capital Markets Approach (March 1989). NBER Working Paper No. w2914, Available at SSRN: https://ssrn.com/abstract=459422

Kenneth Froot (Contact Author)

Harvard University Graduate School of Business ( email )

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HOME PAGE: http://https://scholar.harvard.edu/kenfroot

National Bureau of Economic Research (NBER) ( email )

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Jeremy C. Stein

Harvard University - Department of Economics ( email )

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HOME PAGE: http://post.economics.harvard.edu/faculty/stein/stein.html

National Bureau of Economic Research (NBER)

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